IFA Magazine talks to Alex Araujo, fund manager, M&G Global Listed Infrastructure Fund, to find out how he is positioning the fund during these Covid times and where he sees the biggest threats and opportunities to performance for 2021 and beyond.
IFAM: How has the portfolio been affected by the Covid-19 pandemic during 2020?
AA: As you’d expect, there are winners and losers across the three categories of infrastructure in which we invest. The major impact of the lockdown was in ‘economic’ infrastructure, where the use of transportation infrastructure effectively came to a halt. There was a knee-jerk reaction in the market which we used to our advantage with our long-term investment horizon. Energy infrastructure was another area under pressure. The OPEC supply shock added to a challenging backdrop created by a collapse in demand for hydrocarbons. Utility businesses, by contrast, were highly reliable and consistent throughout the difficult period. When it comes to winners, we’re looking for businesses which can continue to generate increasing earnings, cash flow and dividends. The utilities sector is the only sector where earnings are still growing.
That said, the market is forward looking and the huge fiscal stimulus packages announced by governments around the world led to a swift reappraisal of how some areas of listed infrastructure were perceived. We started to see a significant rebound in transportation infrastructure including airports in anticipation of people starting to fly again. Energy infrastructure also experienced a similar rebound. However, as the second wave has started to hit, it leaves us with an open question as to when we might return to a more normal environment and more specific ones such as what the future holds for the likes of airports etc. as they remain structurally challenged for the short and medium term.
‘Social’ infrastructure was very stable and consistent through the lockdown, similar to the utilities sector, so I would expect this category to underperform as and when the Covid environment eventually loosens again, although the need for hospital infrastructure is very clear. There are structural growth opportunities in this segment and we maintain our exposure, albeit at the lower end of our typical allocation range.
In ‘evolving’ infrastructure, there has been a lot of excitement about communications infrastructure during lockdown given the obvious need for digital infrastructure, whether it’s mobile infrastructure, broadband or data centres, but this is not just about lockdown. This is a structural growth opportunity and we are absolutely bullish on this. Transactional infrastructure took a bit of a step back during lockdown just on the payments infrastructure side, but that is rebounding quickly, as are the royalty businesses. This is why we have the flexibility to invest across the three categories and the various sectors to take advantage of opportunities from a timing point of view when equities come under pressure and we are able to take advantage of the rebound.
IFAM: How do you see the second wave of Covid-19 affecting the portfolio?
AA: In ‘economic’ infrastructure, transportation businesses face difficulties once again and potentially energy infrastructure businesses. During March these stocks came under significant pressure, but we added selectively and aggressively in some cases to holdings we had confidence in. On the rebound which followed, the re-rating of these equity values took the weights of these sectors to quite high levels. What we have been doing is to manage those exposures and bring them back so that gives us some protection. Our much higher utilities exposure, while generating reliable dividend income, also provides a defensive backdrop.
I don’t want to underplay the benefit that volatility can bring. We are a long-term minded investment strategy so if the market in its panic wants to de-rate equity values excessively, we will take advantage. It’s a matter of position sizing and having the appropriate sector weight through periods of volatility.
IFAM: In the aftermath of the US election result, do you see a Biden presidency encouraging long term investment in the asset class?
AA: Infrastructure plays a crucial role as the backbone of the US economy, yet a prolonged period of underinvestment in essential services – from water and electricity to highways and airports – has left its critical assets creaking at the seams.
Biden’s plan ‘to build a modern, sustainable infrastructure and an equitable clean energy future’ comes with two specific targets: net zero carbon emissions by 2050 and US$2 trillion investment in infrastructure during Biden’s presidency.
Even before the election, private enterprise and regional utilities had been investing in green opportunities. The potential for renewable energy deployments in the US is enormous compared to other parts of the world. With renewable energy capacity only half that of Europe and dwarfed by China, the US has some catching up to do.
Higher infrastructure spending in the US provides a potential tailwind across the spectrum of infrastructure sectors. That said, the attractions of the asset class do not hinge on US infrastructure programmes coming to fruition.
Renewable energy, clean transportation, digital connectivity, water and waste management, social and demographic shifts are all enduring structural trends.
Take digital infrastructure, for example, whose critical importance came to the fore during lockdown, as millions of people were forced to work remotely and entertain themselves at home. Whether or not digital infrastructure features in fiscal stimulus packages, the proliferation of data in our increasingly digital world means the need for communication towers and data centres looks set to only rise.
We strongly believe that listed infrastructure benefits from powerful structural themes that can drive growth for decades to come thereby providing sound long-term investment opportunities.
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